INTRO TO MACRO ECON
INTRO TO MACRO ECON ECON 2203
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Econ 2203 Review Our exam will cover chapters 111213 and 14 This outlined is an attempt to help you to narrow your focus and provide a few sample questions Chapter 11 We explained the Keynesian contribution against the backdrop of the great depression Try to recall why it seemed such a convincing position at a time of prolonged recession Focus your reading on pages 248 to 256 and the section on the Keynesian multiplier Key Topics The nature of Keynesian equilibrium The major components of Keynesian consumption expenditures Equilibirum at less than full employment The Marginal Propensity to Consume and the Keynesian multiplier Interpreting a graphical presentation of the Keynesian model The role of scal policy in the Keynesian model Chapter 12 We discussed the potential for scal policy to in uence AD in conjunction with the Keynesian model of chapter 11 Recall that we are concerned with discretionary scal policy the explicit attempt of the government to in uence AD through its tax and spending decisions Focus your reading on pages 268 7 277 ending with Automatic Stabilizers Key Topics Expansionary scal policy options increase in G or decrease in T Contractionary scal policy options decrease in G or increase in T Budget de cits and surpluses Balanced budgets over the business cycle Ricardian Equivalence negating the effects of scal policy Crowdingout reducing the effects of fiscal policy Chapter 13 We discussed the modern fractional reserve banking system and drew comparisons to the previous eras system of goldsmiths As we discussed banks and money we began by imagining ourselves as a small island barter economy We saw that trade was complicated due to issues involving a double coincidence of wants The introduction of money overcame this issue allowing further specialization and trade and increased living standards Finally we discussed the Federal Reserve System its structure and in uence on the supply of money Key Topics The three roles of money Commodity money versus fiat money Fractional Reserve Banking Systems How banks create money by extending loans The organization of the Fed The FOMC The tools of the Fed in controlling the money supply How the Fed targets the Federal Funds rate The Federal Funds Rate versus the Discount Rate The distinction between the Treasury and the Fed Chapter 14 We brie y discussed the effects of monetary policy on the economy s output employment and price level Focus your reading on the transmission of monetary policy and its effects in the short and long run when the policy is anticipated versus unanticipated The graphical exhibits are particularly helpful in this chapter as is the section entitled Effects of Monetary Policy 7A Summary There are only 3 multiple choice questions from chapter 14 and all of them have you interpreting a graph like the one presented in exhibit 9 page 334 Key Topics Effect of monetary policy in the long run Effect of monetary policy in the short run when the policy is anticipated Effect of monetary policy in the short run when the policy is unanticipated Econ 2203 Exam 2 Sample Questions Multiple Choice I dentify the letter of the choice that best completes the statement or answers the question 1 0 When the planned spending of consumers businesses government and foreigners net exports is less than the current level of income the Keynesian model suggests that a output will fall b prices will rise c equilibrium real GDP will increase d inventories will decline Use the graph below to answer the following questions Figure 112 mm Expaldimns Refer to Figure 112 What would happen if aggregate expenditures decreased from AE2 to AEl a Unemployment would decrease b Real output would increase full employment would be achieved c Real output would decrease d Output would exceed the economy s longrun potential Within the Keynesian aggregate expenditure model what happens when consumers buy fewer goods and services than businesses anticipated a Unemployment decreases b Households increase their consumption c Prices increase d Unplanned increases in inventories occur The new classical model implies that substitution of debt for tax financing a increases aggregate demand and exerts an expansionary effect on real output b is highly effective against in ation c reduces savings because it increases both the current and future tax liability of households d leaves wealth and therefore aggregate demand unchanged since the debt will lead to higher future tax rates Expansionary scal policy financed by government borrowing can lead to a higher interest rates and lower private investment under the crowdingout view b an increase in aggregate demand under the Keynesian view c no change in aggregate demand under the new classical view d all of the above The crowdingout effect suggests that gt1 9 a expansionary scal policy causes in ation b high marginal tax rates crowd out tax deductions c scal policy will be less effective at shifting aggregate demand because the effects are at least partially offset by other factors that result d a budget surplus will cause the economy to slip into a major recession The US economy weakened during the latter half of 2000 and fell into a recession beginning in March 2001 At the time the federal budget was running a substantial surplus The newly elected Bush administration advocated a tax cut that was enacted in July of 2001 According to the crowding out effect this tax cut a was highly inappropriate because it reduced the size of the budget surplus b was highly appropriate because it would provide a strong stimulus to aggregate demand and thereby shorten the recession c was not very important because the quotdemand stimulus effectsquot would be largely offset by additional borrowing and higher interest rates d was not very important because the quotdemand stimulus effectsquot would be largely offset by the expectation of higher taxes in the future Without money to serve as a medium of exchange a gains from trade would be severely limited b our standard of living probably would be reduced c the transaction costs of exchange would increase d all of the above are true Like the goldsmiths of an earlier era modern bankers a derive income by using the funds of their depositors to extend loans b expand the supply of money when they extend additional loans c hold only a fraction of their assets in the form of reserves against their deposits d All of the above are correct If the Federal Reserve wanted to expand the supply of money to head off a recession it could a decrease the reserve requirements b lower taxes c sell US securities in the open market d increase the discount rate When the Fed unexpectedly increases the money supply it will cause an increase in aggregate demand because a real interest rates will fall stimulating business investment and consumer purchases b the dollar will appreciate on the foreign exchange market leading to a decrease in net exports c lower interest rates will tend to decrease asset prices such as the prices of homes which decreases wealth and thereby decreases current consumption d all of the above are true Exhibit 14 5 Prlce level Real GDP Refer to Exhibit 145 AD1 and SRA81 indicate the initial conditions in an economy with the current level of output Y 2 being the full employment level and the current price level is P1 If the Fed unexpectedly increases the money supply the shortrun impact of this policy will be a movement to a P1 and Y2 b P2 and Y1 c P2 and Y3 1 P3 and Y2 Refer to Exhibit 145 AD1 and SRA81 indicate the initial conditions in the economy If the Fed unexpectedly increases the money supply in the long run the impact of the unanticipated expansionary policy will be a movement to a P1 and Y2 1 P2 and Y1 c P2 and Y3 1 P3 and Y2 Refer to Exhibit 145 Return to the original conditionas at AD1 and SRASl shown by output of Y2 and a price lvel of P1 Suppose the increase in the money supply had instead been fully anticipated The shortrun impact of this policy will be a movement to a P1 and Y 2 b P2 and Y1 c P2 and Y 3 1 P3 and Y2 Fiat money is money that is backed by a gold b silver c nothing d clam shells The legal requirement that commercial banks hold reserves equal to some fraction of their deposits a limits the ability of banks to expand the money supply by extending additional loans b prevents the Fed from controlling the money supply since commercial banks can always offset the actions ofthe Fed c prevents runs on banks by depositors who fear that banks have insufficient assets to meet the claims of their depositors d limits the ability of the Treasury to expand the national debt The fraction that banks must by law hold as reserves against the checking deposits of their customers is called the a federal deposit insurance premium 2 2 2 2 0 2 D b vault cash quota c excess reserve requirement d required reserve ratio A system that permits banks to hold less than 100 percent of their deposits as reserves is called a a federal reserve system b fractional reserve banking system c partially funded deposit insurance system d gold standard banking system Excess reserves are a checking deposits that are included in the M1 money supply but not the M2 savings deposits that are included in the M2 money supply but not the M1 actual reserves held by banks that exceed the legal requirement the portion of deposits that banks are required by the Fed to hold as reserves against their deposits b c d If Federal Reserve policy increases the excess reserves of banks why will banks want to expand their loans and investments a Banks are legally required to expand loans and investments when the Fed expands reserves b Since excess reserves are a noninterestearning asset the banks will want to extend loans and make investments rather than hold the reserves c The banks will assume that the Fed s action will reduce uncertainty and improve the future profitability of business d both a and c above Use the graph below to answer the following questions Figure 116 A AZ 00 plum Expcru quotInn s my kca Gap in mm Refer to Figure 116 If the economy s potential GDP is 30 trillion and aggregate expenditures equal AE1 which of the following will occur a Businesses will expand output in the next period b Actual output will be less than the economy s potential GDP c Actual unemployment will be less than the natural rate of unemployment d Prices will tend to rise If the MPC is 34 the simple expenditure multiplier is a b 133 c 175 d 075 The primary determinant of consumer spending is 2 4 2 U 26 the interest rate disposable income expectations of in ation the stage of the business cycle 99 lt79 If the federal government runs a budget deficit in order to nance an increase in spending where do the funds to finance the spending come from a increased personal income taxes b increased corporate income taxes c increased government borrowing d increased tariffs on imports Keynesian economists argue that a an increase in government expenditures will directly stimulate aggregate demand b policymakers should limit government spending to the level of revenue generated by taxes c a reduction in personal income taxes will increase disposable income and thereby stimulate consumption and aggregate demand d Both a and c are correct e All of the above are correct The Keynesian analysis of fiscal policy implies that scal policy should generally be expansionary scal policy should generally be restrictive the federal budget should be balanced annually except during war taxation and expenditure policies should be used to maintain aggregate demand at a level consistent with fullemployment 99 57 Economics 2203 Macroeconomics Frank and Bemanke Third Edition Review Questions for Exam 2 Chapters 8 11 Important Note Up to 20 of the points on the exam will be earned from questions covering the material from the text and homework including videos These questions will be multiple choice andor true false Chapter 8 Workers Wages and Unemployment in the Modern Economy 1 What are the ve important labor market trends 2 Explain what determines the demand for labor Using diagrams show the effect on employment and wage rates of the following a investment in human capital Investment in physical capital Technical change Allowing large numbers of immigrants to enter the country Increases in the prices of the goods that labor is used to produce A minimum wage that is below the equilibrium wage A minimum wage that is above the equilibrium wage mass0575 3 Given the following data for the Wardle Cement Co of yards of Product Workers cement thousands installed of yards per week a Explain what the VMPL actually measures b What is the contribution to the rms revenue of the 8 11 worker to the company s revenue 0 What is the contribution of the rm s output of the 7th worker d If the weekly wage rate is 500 how many workers should be hired What rule did you use to determine this If the price of the cement increases to 100 per yard how many workers will be hired Explain f If the government mandates that businesses must provide free health insurance to their employees that cost 250 per week what effect will this have on employment Explain g What might explain the results of hiring the 9th 10 h and 11 h workers h If the nominal wage is 500 what is the real wage 9 There is an increasing gap between wages of unskilled and skilled worker Explain two causes of this and illustrate your answer with diagrams Identify and brie y explain the causes of the three kinds of unemployment Which one is the focus of macroeconomic policy Why The unemployment rate will never be zero Explain why Discuss why unemployment rates are so much higher in Europe than in the US Chapter 9 Saving and Capital Formation De ne saving and capital formation How are they related What is wealth What is the difference between wealth and income How are they related What is a capital gain What is a capital loss What is the relationship between wealth and saving and capital gains and losses There are three reasons why people save Brie y explain what each of these is Is it a big problem that US households save so little Explain why or why not What are the components of national saving Use an equation to illustrate your answer Given the following data calculate a total national saving b private saving c government saving d total investment GDP 11 trillion Household Consumption 5 trillion Total Government Spending 1 trillion Total net tax collections 27 trillion What is the relationship between the government budget de cit or surplus and national saving Use an equation to illustrate your answer 15 Suppose the following is the consolidated balance sheet for the US economy Assets Value in Liabilities Value in Total Debt 5 Value of Real Estate V a What is the value of the wealth for the nation as a whole b Suppose the housing market crashes and people lose 20 of the value of their real estate Calculate the change in the nation s wealth c Suppose the stock market surges and the average price of stocks goes up by 10 What effect does this have on the nation s wealth d preople sell their stocks and spend all of the proceeds from the sale of stocks on bonds what effect will this have on the nation s wealth 16 What are the factors that effect the investment decision 17 Use a diagram to show how the real rate of interest is determined Use this model to show the effect on the real interest rate and investment saving of the following a The emergence of a new technology b Increase in the government budget deficit c A decrease in the government budget deficit d An increase in the marginal productivity of capital 18 Given the following data calculate implied rate of in ation Real rate of interest 2 Nominal rate of interest 6 Chapter 10 Money Prices and the Federal Reserve 19 Define what money is and explain its three functions What is meant by M1 and M2 20 When the Federal Reserve buys anything bonds or real assets money is created Why 21 Suppose the Fed purchases 1000000 in bonds through open market operations Assume that the sellers of the bonds deposit all of their money in commercial banks Further assume that the reserve deposit ratio is 15 How much money will eventually be created as a result of this action Use a consolidated balance sheet to illustrate and explain the process of money creation Repeat this exercise with the assumption that the Fed sells 1000000 worth of bonds instead of buying them What is it called when the Fed buys and sells government bonds 3 22 23 24 December 1933 What the main responsibility of the Fed What is its primary mission How and why did congress give autonomy to the Fed Give an example of what might happen without this autonomy Use the data below to answer the following questions billions US Currency Reserve deposit Bank Money held bV public ratio reserves supplvquot December 1929 385 0075 315 December 1930 379 0082 441 December 1931 459 311 373 December 1932 482 0109 318 340 0133 345 308 a Fill in the blanks of the above table b What does the above data tell you about the cause of the Great Depression Explain 25 26 De ne the velocity of money How is it measured Does it matter which money supply M1 or M2 that is being used Explain Assuming V is constant the rate of growth of real GDP is 3 and the growth rate of the money supply is 10 what will be the rate of in ation Present the appropriate equation to explain your result Chapter 11 Financial Markets and International Capital Flows 27 28 29 The nancial system in the Us helps savings to be allocated to best uses Explain the two ways that it does this The nancial system in the Us is made up of nancial intermediaries Explain what a nancial intermediary is List the major ones we have discussed How do banks increase the ef ciency of the capital market What is a bond How does the bond market act as a nancial intermediary What is the relationship between bond prices and interest rates Illustrate your answer with a speci c example Suppose you purchased a bond on December 15 2006 The principle amount on the bond is 1000000 the coupon rate is 5 and the current interest rate is 4 What is the market price of your bond on December 15 2007 40 41 List and explain the two sources of return to stockholders Ifthe interest rate rises and the economy goes in a slump what will happen to stock prices Explain carefully in terms of the principles we have discussed What is the risk premium for stocks How does it affect stock prices Explain Explain why bond and stock markets make the economy more efficient Explain brie y what is meant by international capital ows What is the relationship between international capital ows and the trade balance What is the relationship between the real interest rate and net capital in ows Use a diagram to illustrate your answer Discuss the importance of net capital in ows for an economy One of the most important macroeconomic relationships is that Total Saving Investment Why is investment important to an economy Total saving is the sum of three components private saving public saving and foreign saving Write an equation showing investment as a sum of these three components using the following variables Y C I G NX Identify each of these variables Use the SavingInvestment diagram for an open economy to determine the effect on the real interest rate and investment in the Us resulting from the following a The US adopts a isolationist policy that discourages foreign capital investment b The Indian government adopts policies that make it very attractive for foreign firms to invest in India Many of these firms have previously invested in the Us c The US trade deficit is cut in half by increasing exports and decreasing imports Explain why the Argentine economy collapsed in 2001 7 2002 See Economic Naturalist 113 What role did political instability and government budget deficits play in this Explain